The Procurement Value Proposition: The Rise of Supply Management – Chapter 10

Chapter 10: Reflections and Conclusions

 

Overview

The very ink with which all history is written is merely fluid prejudice.

– MARK TWAIN

The purpose of this book is not to supply answers but to lead the reader towards thinking. We have established that in truth there is no best practice – only good, better and, quite obviously, bad practice too. To some this fact is intuitive – but nonetheless it is worth pointing out.

We have looked at how procurement has evolved and what is open to procurement professionals today. We have examined the potential of the ACE model and how this can be used in conjunction with our model of procurement maturity to help the procurement leaders work out for themselves what practice developments can be made, and to see how they can advance their own procurement practice to achieve their aspirations whilst taking account of both capability requirements and requisite levels of execution if they are to reach the heights they are aiming for.

Reflections

We need to spend more time thinking

There is no ‘best’ practice, we just need to think more. But, you might ask, what is the point of thinking about things? We just need to get on with the job don’t we? Well, do we? Is there a point to this thinking, this ‘philosophizing’?

There are times that we should allow ourselves to be esoteric. We should contemplate the world and our place in it. Otherwise, how can we be sure that the world is really as we take it to be? How can we tell whether our opinions are objective or subjective?

These questions are not only baffling they also defy simple processes of solution. They are not like practical questions that relate to our everyday experience. They require reflection – we might wonder whether what we say is objective or just our own perspective, our own ‘take’ on a situation. By thinking in this way we confront questions of knowledge, objectivity, truth and what we mean by them.

This kind of thinking takes us beyond the snapshot decisions of everyday life. Thinking reflectively allows us to consider our ideas and concepts in a different way. In the end, it’s not a matter of how much you know, but what you can do when the going gets tough. If there is disagreement of opinion, a successful outcome will depend on being able to reflect on your opinions and values whilst taking seriously the implications of other ideas.

What should we spend time thinking about?

Why bother with reflection? Reflection doesn’t get the world’s business done – it doesn’t bake any bread or build houses, so why not put this reflective notion to one side and simply get on with our lives? Well, from one perspective we know that reflection matters because it is continuous with performance. How you think about what you are doing affects how you do it, or whether you do it at all. It might direct your work, or your attitude towards people who do things differently.

For example, many people think that to be a good business person we should only be interested in ourselves – especially in the buyer–supplier relationship. They feel that it is about power and we should only focus on looking out for our own advantage, never really caring about anyone else; here, apparent concern disguises hope of future benefit.

In fact, if we do think that this is how things should be then our relationships with others will suffer. Meaningful interactions will be affected, which has costs, and cooperative ventures become nigh impossible. This is the ‘war against all wars’ in the marketplace. By always looking out not to be cheated and claiming to be a ‘hard nosed’ business we incur heavy transaction costs, because we are looking at human motivation through the wrong lens and misunderstanding what is actually going on.

Some of the most forward-thinking CPOs we interviewed understand the importance of challenging our mental models and pushing ourselves to consider the greater good that can be created through consideration of the broader ecosystem. For instance, Tom Linton of Flextronics noted the following:

The siloed approach of building ‘control towers’ is giving way to a new layer of capabilities. Some of us are realizing that supply chains are more vertical than virtual, and even going back to the Japanese – becoming more virtually vertical. What this means is that we are becoming more reliant on partners and creating a virtual vertical integration – which means more connectivity between other companies.

As a result of the flattening of labour, we are actually becoming more regionalized as we become more global, and sourcing is becoming much more regional and local, because that is where we can begin to have the right types of relationships, communication and understanding.

Because what is happening is that unpredictability is becoming more predictable. Procurement is like quality [assurance] was 30 years ago. Except that now, if you are not socially and environmentally responsible and are not caring for those working under you to ensure that there is no violation of labour laws, you cannot survive. It is now fundamental as the world has become much more flat.

One of the most important books of the 2010s in my mind is Robert Wright’s Nonzero: The logic of human destiny.[1] It starts with a premise that the world is moving to non-zero-sum, which means that we need to be adopting a non-zero approach to procurement. Think ofthe Eskimos – they worked together to kill a whale and they shared it with other tribes. In this manner, the tribes were able to survive a very difficult environment, by forming alliances and states and working together. Their tribes marched through time based on collaboration. So I think non-zero approaches to supplier management will continue. There will be a force at play: more collaborative ways to do business – but there also needs to be a balance: what is the supply chain you respect the most?

Troglodytes, the Enlightenment, a Pole, a Frenchman and an Italian

From cave dwellers and their needs to our complex world how much real difference is there? Maslow’s ‘hierarchy of needs’ would in our estimation reflect that there is little real difference.[2] We’ve simply got more stuff now and a more complex world where we need to make more decisions about things; but the basics – food, shelter, warmth, procreation, love, art – all existed then.

During the Enlightenment, society encountered a move away from a world view shaped by centuries of religious ideology to one shaped by science. This period in Europe saw people such as Copernicus (heliocentric model of the solar system), Descartes (cogito ergo sum) and Galileo (mechanical science of nature) all fall foul of the teachings of Catholic orthodoxy. All three were prepared to live their beliefs, all of them wanted to develop their and our understanding of the world we live in. And they did this despite the fierce backlash from both the Church and the state. In doing so they helped us to change the lens through which we view the world; but being different is hard and often gets a lukewarm reception, even from supporters.

[1]Robert Wright, in his book Nonzero: The logic of human destiny (2000), argues that biological evolution and cultural evolution are shaped and directed first and foremost by ‘non-zero-sumness’, ie the prospect of creating new interactions that are not zero-sum.

[2]Maslow, A H (1943) A theory of human motivation, Psychological Review, 50, pp 370–96.

Back to the five game changers

So let’s turn our attention back once again to Chapter 4. Today we are witnessing increasing volume, speed and importance of flows across borders. Flows of people, ideas, greenhouse gasses, manufactured goods, dollars, euros, TV and radio signals, drugs, germs, e-mails, weapons and a good deal else. The world we live in is one that moves faster across more dimensions and with more complexity than ever before. Such rapid change is leading to new opportunities and we are increasingly facing situations for which we have no precedents. This requires hard thinking and new thinking: we need to change our mindsets in order to survive and thrive in this changing world!

One increasingly important idea regarding how we might work in this faster and more complex world is that of mass collaboration. As already stated, it is more than 50 years since Peter Drucker coined the term ‘knowledge worker’,[3] a recognition that the majority of workers no longer used their hands at work but instead use their brains. Again, this requires a realignment of our thinking.

Never have people who think for a living been more important – or more in demand. Today, a large part of the labour force is made up of people for whom complex problem solving is the primary component of their job, and increasingly people’s jobs require significant abstract thinking and judgement skills. It is no secret that knowledge workers are proving to be a key source – if not the key source – of competitive advantage; and effectively leveraging knowledge workers is significantly more challenging than squeezing out productivity gains by improving processes.

It will come as no surprise, then, that an organization full of thinkers is quite different from one full of doers. Couple this with the changes brought by our increasingly globalized world and it is quite apparent why businesses will need to ‘think up’ new ways of utilizing the talent working with them – and the relationships they have in their supply networks – far more effectively in a far more competitive environment.

[3]Drucker, P (1959) The Landmarks of Tomorrow, Harper & Row, New York.

Reflections on the five game changers from a procurement perspective

 

Procurement professionals have to get savvy. Here the difference between the ‘doer’ (the buyer of old) and the ‘enabler’ (today’s strategic procurement professional) is most pronounced. Procurement professionals today and in the future will need to be:

  • professional;

  • polished;

  • intelligent;

  • respected;

  • influential;

  • persuasive;

  • visionary;

  • strategic;

  • sharp;

  • global;

  • collaborative;

  • executive;

  • business savvy.

All these terms reflect the discussion in Chapters 6, 7 and 8. These are the attributes of the future supply professional.

As discussed, the competition for talent is heating up. In fact, there is considerable opinion regarding the talent pipeline. Is it too sparsely populated to meet the demand for strategic market-facing professionals we need? Or are we ignoring the fact that the people are there but that we are just asking the wrong questions of them? The outcome will be intense competition to attract the best and brightest, but it is likely to be on their terms.

We need some sort of reality check regarding professional procurement and its value to the business. What some would like to believe is that due to the large depth of external value-add from procurement it delivers a substantial bottom-line impact. Others might say no, procurement is thegraveyard of the enterprise. Some might say that due to the cross-functional nature of our role we draw the best talent, whilst others might say that procurement is in fact a professional silo.

Also, some believe that due to the strong commercial requirements of procurement we breed management material, whereas critics might say, ‘Ah, but the CPO is often based in the financial community and reports to the CFO and not the main board.’

Reflections on the consequences of procurement maturity and its value to business

A cursory glance at the outputs of the overabundance of industrial journals and consultancy white papers and reports, as well as the myriad blogs and other commentary, reflect unequivocally what can be expected of contemporary procurement. Moreover, they articulate that those setting thepace in developing better procurement practice differ from conventional businesses along three dimensions: they hire better people, they set clearer performance aspirations and they create strong procurement cultures, which are aligned to the corporate strategy.

The result of this clarity of thought is clearly reflected in the results of the companies they operate in. These leading companies enjoy annual cost savings from their overall sourcing efforts that are nearly six times greater than the annual savings of low performers. Moreover, the winners are positioning themselves for broader strategic gains as the pressures of globalization intensify.[4]

So what does this all mean? As mentioned above, change is hard and requires a degree of bravery; a move away from orthodoxy and tradition is required. Some of the critical features of bringing this change include ensuring that procurement is aligned to and supports the corporate strategy:

  • The way contemporary procurement professionals think, feel and conduct themselves in the workplace, individually and collectively must reflect an embedded commercial focus.

  • Procurement‘s strategies and processes must be shaped around a desire to create explicit value, with the resources of the procurement function being managed in such a way that the function naturally and effectively interacts with other functions.

  • Procurement‘s productivity must make a contribution to company success relative to cost, revenues, quality and execution speed.

[4]Reinecke, N, Spiller, R P and Ungerman, D (2007) The talent factor in purchasing, The McKinsey Quarterly, 1.

Attracting and retaining the best and the brightest procurement talent

As already stated, there is a lot of speculation today regarding the demand for top talent in procurement. Indeed, many of the leading industrial journals have indicated that finding enough qualified talent is amongst the top management concerns of businesses.

Procurement‘s role is progressing from decision support to one requiring a predictive capability; increasingly there is demand for procurement professionals who can demonstrate that they are both commercially focused and analytically capable. It would appear that the emergence ofthese skills rests on three factors:

  • The success that many procurement departments have had in increasing their influence on indirect spend in the business: as their influence has grown in respect to spend management, it seems that the requisite number of staff to manage that spend has not been recruited in line with the growth.

  • The volatility of commodity prices: in an attempt to manage the risk, this uncertain environment has generated senior managers who have been looking to procurement to use its teams to round in on the issue. Yet it is not uncommon for CPOs to have people in their teams who (as discussed earlier) are woefully lacking the prerequisite skill sets to fulfil the need.

  • Since the mid-1980s we have witnessed changes in both procurement and business yet the skill sets of many in the procurement function have remained tactical. This is because qualifications or learning have been either under-utilized or ignored, whilst the growing strategic influence of procurement has created a demand for something different.

Clearly some people can be retrained to meet these new demands. Whilst others, unable to adapt to today’s more strategic skill sets, will need to find jobs elsewhere in the business or be transitioned out completely. These drivers have both increased demand and changed thefundamental requirements of what talented ‘procurement‘ professionals means.

There is therefore an imperative, to get the right talent right now, to attract the right talent and quickly. We have listed below a few indicators that should be considered regarding the potential attractiveness of a business to smart candidates:

  • Where are you based in relation to other top employers inside or outside your industry sector?

  • Has your business been through hard times?

  • Is the salary you are offering attractive in the current job market?

  • Is the scale and scope of the role appealing enough to attract top talent?

  • What kind of relationship do you have with your HR department?

  • Can you articulate the skills and abilities you want well enough?

  • Who is the final arbiter regarding the job specification?

  • Who will choose the successful candidate?

Without a clear expectation of the type and quality of the people you want, and how you will position the role to attract them, you are setting yourself up to fail. In particular, the best procurement organizations want people who can make sound commercial decisions. The traditional transactional skills of procurement on which the function was built are changing with increasing importance towards people who are culturally aware. Look for people who are collaborative, innovative, diligent optimizers with strong leadership skills:

  • Developing a strong relationship with your HR department is essential. One area where there is a great deal of room for improvement is in the dynamic between HR and procurement. If you want top people don’t get out your standard job description template. To attract thebest people to apply for your vacancy make the job description compelling; explain why the candidate should be excited about this opportunity. Then describe the duties, and only briefly mention the requirements. If it’s not a challenging job, who will want to apply for it? Once you have done this, make your decisions quickly – candidates are most receptive to offers in the first week after their interview, don’t let good candidates die on the vine.

  • When it comes to your star players you need to accelerate their potential to rise within the business, or create opportunities for them to gain breadth. For example, if someone is very good at procuring a particular commodity, advancement may take the form of growing laterally as opposed to vertically – moving into different categories or leading special projects.

  • It is better to recruit for talent, not background. It is critically important to differentiate between your requirements and your preferences so that you don’t waste time searching for the ‘nice-to-haves’ rather than essential requirements.

To improve recruitment and retention levels in procurement, it is crucial to create a deeper working relationship between procurement and HR. Building strong partnerships that will allow talent management to succeed, functional and procurement executives need to go beyond their comfort zone and adopt a much more creative, candidate-centred approach to recruitment and retention.

Procurement managers can no longer rely entirely on HR, and must instead shoulder some of the responsibility for recruiting the best and the brightest. By investing time and resources, developing clear and appropriate job roles and setting out clear paths for professional growth and advancement you will find, develop and retain the talent your organization needs.

We are entering the era of the bimodal procurement professional

In contemplating writing this book we were intrigued by the slow progress of real change in supply management. Despite a plethora of readily available and high-quality commentary about contemporary procurement practice, which is frequently backed by solid experience and empirical data, many procurement organizations remain loath to move beyond the most basic level(s) of professional procurement practice.

It is now well documented that few if any companies can allow procurement to be managed in isolation from overall business systems. From previous work in this space, primarily with Bath School of Management,[5] we have produced evidence that suggests supply management requires greater integration, stronger cross-functional relationships and more senior management involvement.

The procurement profession needs to explore two perplexing questions:

  • Is an alternative procurement mindset starting to emerge – one that recognizes there is no substitute for having deep procurement skills combined with a sense of ambition, accountability and self-responsibility? This personal credo must be aligned with specific organizational goals but, more significantly, it must be actively conscious of strategic issues as well as longer-term horizons.

  • In what ways can this new mindset be nurtured and how can people make the transition?

This perspective, that a new modus is required in order to get some traction in businesses, is even more astonishing when one reflects that it is 30 years since Peter Kraljic published his seminal paper on procurement‘s future.[6] Today this serves to underscore the issue of change inertia in procurement. But will contemporary businesses tolerate this inertia? We work in a world where aligned and agile procurement with a firm focus on profits rather than simply cost-savings is what is required; and whilst this may look something of a tall order, people must be found who can meet the challenge and excel. While some of these competent, confident, high achievers are already in the profession or will be recruited, above all they need to be nurtured and directed by competent leaders.

In procurement, competence must be based on an understanding of appropriateness. This means knowing what to do to deliver strategic goals operationally within specific supply chain and market circumstances. This requires people with a well-developed professional knowledge of theprocurement tools and techniques at their disposal, supported by well-developed commercial acumen.

Commercial prudence is a prerequisite in the contemporary supply management professional. Competent and confident they will be able to work with both risk and reward in contracts, and accept and manage greater risk in relationships, they will be the ‘intelligent client’ able to motivate suppliers.

Technology too has created challenges – smartphones, tablets and embedded chips have initiated a mobile work environment in which the modern supply professional must feel comfortable. Added to this, in the era of ‘big data’ they have to be adept at handling and analysing data, able to see major trends and important takeaways at a glance.

[5]Chick, G and Lewis, M (2009–10) 7 habits of highly effective CPOs, CPO Agenda, Winter, pp 50–54.

[6]Kraljic, P (1983) Purchasing must become supply managementHarvard Business Review, 61 (5) September–October, pp 109–17.

Why risk has become the number one issue

For the foreseeable future one suspects that risk will dominate the thinking of CEOs and CPOs alike. As emerging economies place successful, fast-growing and culturally different companies into the global markets, the process of selecting suppliers will carry more risk, more complexity and become more fluid.

Research commissioned by CIPS anticipates big increases in companies’ awareness around supply risk and also an expansion in their perceptions of where risk lies.[7] By way of example, if we look at two areas of the world where, in 2014, current tensions are creating situations that create greater volatility and increased risk – Russia’s actions in the Ukraine and ongoing tensions in Asia – the foregoing becomes clear in reflecting global risk.

Weakening growth in China (as well as other emerging economies) combined with geopolitical tensions are the biggest risks to financial markets, and these two things are dangerously interconnected right now. The repercussions of the situation in Ukraine will reverberate well outside of theEuropean context. In Asia, the sovereignty over various islands, islets and reefs is disputed. Some may see Putin’s land grab as an inspiration to do something similar regarding their ongoing disputes over the Senkaku/Diaoyu, Paracel, Pratas and Spratly islands and the Macclesfield Bank and Scarborough Reef.

[7]Cousins, P, Squire B and Lawson, B (2008) Looking to the Future: Purchasing as Cost Reducer or Value Broker? A research report carried out for the CIPS Centre for Procurement Leadership by Manchester Business School, July.

Procurement relationships in China

Stability in Asia is important to global markets, and yet there seems to be an unbridgeable gap between China and Japan. The two Asian powerhouses cannot see eye to eye on issues such as military armament, human rights, Taiwan, regional security and even the rule of international law. The relationship between Japan and the United States on the one hand, and the impact of this relationship on China, on the other, is increasingly competitive and the same applies to several other power balances in the region.

China in particular is becoming increasingly uneasy about its position within the current global order. After all, this creaking edifice has been set up, and is still largely dominated by, the West. This changing geopolitical landscape and the fragmentation of the international community is complicating global governance. The world lacks clear structures, while constantly changing coalitions of countries, international institutions, businesses, movements, and NGOs are trying to get to grips with a raft of risk-laden issues such as pollution, territorial conflicts, terrorism and attempts to govern the internet.

One of the topics we have been exploring is the interesting nature of social and economic relationships between buyers and sellers in China. This set of relationships does not fall under the typical theoretical rubrics that are conveniently applied in Western culture. Somewhere between thestrong predicted relationships identified by transaction cost economics,[8] and social exchange theory,[9] there seems to be white space when it comes to understanding how buyer-seller relationships are governed. Nowhere is this more the case than in emerging economies such as China.

When one overlays the cultural artefacts that exist in Chinese culture and the roles of ‘guanxi’, there is comparably little research that specifies how such relationships unfold, and the types of outcomes that can be predicted. Recent research calls for a deeper set of explanations that translates the typical Western pragmatic business relationships into a Chinese context and provides substantive guidance for how to build effective business relationships that build trust in China.[10]

This recent research points to the fact that ‘guanxi’ is in reality an important cultural artefact that embodies the level of trust that exists in a relationship. The two forms of trust that develop include cognitive trust that emanates from the confidence one has in the partner’s accomplishments, skills and reliability (‘trust from the head’) as well as the emotional trust that arises from the feelings one has in the partner’s emotional closeness, empathy and rapport (‘trust from the heart’).

Both forms of trust are needed to effectively establish business ties in a Chinese buyer–seller relationship. However, we currently have little understanding of the relative importance of these forms of trust and how they are established through patterns of communication between buyers and sellers, under different conditions of power, which are oriented in Chinese high power distance culture.

This is made even more so when Western managers travel to China, and fail to understand what goes wrong when they attempt to build supplier relationships in China. To some extent, the nature of power plays an important role here. When power distance is higher, coercive power will be more effective in influencing others, while when collectivism or guanxi culture is more typical, non-coercive power will be more effective.

So, the predictive power of the power theory developed in the Western world will be weak in Chinese combined high power distance and guanxi culture. Other work by the authors of this book points to the challenges of finding supply management talent in China, which we discussed with John Zapko, vice president of global procurement at Lenovo:

Zapko: Without question, attracting talent, bringing it on board, being able to hire this talent and especially retaining talent around the world in some of our most important positions, not only at management levels, senior management levels, but also commodity managementand the people that really focus on the procurement activity, driving the supplier-based management  negotiations, contracts. As we drive in this complex world, having that level of talent is really critical for us, and it is clearly the biggest challenge we have.

Authors: How do you create talent and why is it so important in a complex world? We’ve been hearing a lot about global complexity and the challenges in dealing with governments, with regulations. Why is talent so important in procurement as you work these issues?

Zapko: Global complexity is becoming more and more significant for us – as we drive our growth, in emerging markets especially, and as we drive our activity into those emerging markets, people that really understand the procurement role, with experience in delivering professional procurement activity  in a more complex environment in the merging market, where government regulations’ specific uniqueness is around contract.

Our ability to manage new emerging suppliers demands key critical skills, which if we don’t have we are seriously lacking. So when we find people with these skills and experience, whether built internally through activity, growth and development, or whether we hire it in – once we have it and once we’re driving the advantages with it we really have to retain it. And so that becomes the major initiative for us as we work in this complex world.

Until recently, most of us assumed that countries derived their security interests from their economic interests. Vladimir Putin has made it clear that this may well be a rather naive hypothesis. A preoccupation with power will continue to play a prominent role in international relations and markets. This in conjunction with national pride and prestige could send tensions, and with them risk ratings, sky high.

Some commentators have begun to talk about the potential for war in Asia. Although a real war seems very unlikely, Graham Allison talks about the Thucydides Trap, which maintains that the likelihood of war increases greatly when a rapidly rising power competes with an established power. In the past 500 years, 15 such situations have occurred; in 11 cases, the result was war. Sometimes the complicated dealings between various allies made the situations more explosive.[11]

Will China decide to test the waters and, if they do, is the US really prepared to step in? For some time the US has provided safety guarantees to the Philippines and Japan, but what if the continuation of this guarantee leads to war? The commitment of the US has been in doubt before and this view will increase since the global financial crisis has reinforced the impression that the West is losing strength. In 2007, the US economy was four times the economy of China. In 2012, it was twice as large. Given the West’s powerlessness to stop Russia’s brazen push in theCrimea, might this make China reckless?

But it is not only China that is causing concern. Japan under Prime Minister Abe, who has a nationalistic bent, wants to rewrite the Japanese constitution to give Japan a ‘normal’ army. In many ways, such a change is defensible but it is worrying in combination with Abe’s visits to theYasukuni Shrine, and the fact that he is just paying lip service to the Kono and Murayama declarations.[12]

Geopolitical tensions tend to rise once countries are in choppy economic waters. Undoubtedly, Vladimir Putin will have considered Europe’s weakened position before he decided to annex Crimea, especially as the members of the eurozone are focused on their own economic crisis. Some politicians might even decide to go the other way, playing the nationalistic card, making sure the country is united against a perceived outside enemy in order to divert attention from domestic issues. Japan may well have a period of economic turbulence ahead, due to an increase in its rate of VAT, disappointing wage settlements and lower than anticipated consumption data. If Japan’s economic measures turn out to be a disappointment Abe might well turn to a ‘nationalistic’ agenda.

Today opinions differ about the economic prospects of China. Some think it will manage to deflate the credit and property bubble in an orderly fashion. In spring 2014, Beijing let the money market rates rise to show that it does not shy away from tackling excessive credit. But it is also propping up state-owned companies. This is far from ideal, but it could pave the way towards gradual deleveraging instead of the severe shock of a crash.

Some of the global financial institutions are less sanguine. They are concerned about excessive investment funded with excessive debt in China. A sudden collapse of asset values has been mooted as not unlike the 2008 crash in the US economy, with too many debtors unable to meet their interest and debt repayment commitments. Interest payments on outstanding debts run to 17 per cent of GDP (twice the percentage in the US in 2007). In 2004 every invested yuan yielded 1 yuan in GDP growth; at the time of writing in 2014 it is four times that and, as a consequence, growth could slow considerably. As with northern hemisphere countries in 2008, a growth slump would stoke unrest in other regional economies producing a similarly negative impact on the rest of the global economy.

So could an escalating Ukraine crisis impact global trade, increase energy prices and hit economic growth in Europe? Will conflicts in Asia have far worse implications for the world economy? Whilst war is unlikely, this could be the beginning of a period of mounting tensions with more geopolitical power games, a lack of decisive action by international institutions, a more cautious America and economic headwinds in Asia. All of which spells increased risk and supports the view proposed in this book that procurement professionals need to know much, much more than how to do a deal and reduce purchase costs.

[8]In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange or the cost of participating in a market.

[9]Social exchange theory is a social psychological and sociological perspective that explains social change and stability as a process of negotiated exchanges between parties.

[10]See Rob Handfield’s SCRC Supply Chain Blog, 12 December 2013, Unlocking the Secrets of Guanxi in Supply Chains.

[11]Allison, G (2014) A good year for a Great War, Harvard, Kennedy School, Winter.

[12]Yasukuni Shrine is a Shinto shrine in Chiyoda, Tokyo, Japan. It was founded by Emperor Meiji to commemorate individuals who had died in service of the Empire of Japan.

Procurement must drive productivity to generate value for the business it serves

As industry faces the challenges to improve productivity, augment sales and reduce costs, there are greater expectations from business leadership for procurement professionals to develop and implement approaches that can assist businesses in addressing these challenges and to help them realize value.

These expectations and options for value creation have been examined in this book, looking at the role of contemporary procurement and its value proposition to the business. A broad theme has emerged from this examination, one in which procurement is moving from the role ofstrategic procurement to one of value procurement.

In its traditional role, procurement was focused on basic purchasing and sought to secure stable supply at the right price and quality while ensuring compliance. In this environment, the emphasis is on centralized processes and making transactions more efficient. Typically, the buying is local, and there is little or no category/strategic management.

Procurement evolved to strategic procurement, where the clear focus is on generating savings. Strategic procurement involves applying category management, aggregating global or regional volumes, establishing long-term agreements, and the introduction of automated tools and systems to generate the desired savings. In its next evolution procurement is focused on augmenting spend, by generating higher returns per pound, euro or dollar by focusing on demand management. Allied to this is process management, how goods and services are bought.

Organizations are seeking to move beyond this towards procurement‘s next iteration, by developing ways to optimize costs and generate value across businesses. We are now in the phase of going beyond procurement to drive company-wide productivity, which involves presenting thebusiness with options to achieve that goal: we call this value procurement.

Value procurement is the realization of all of the benefits to be gained by the implementation of good procurement practice (as described in the model in Chapter 2). This encompasses everything from the foundations, the application of procurement‘s ‘five rights’,[13] through to thereduction of unneeded demand activity, complexity, immediacy and variability. Here the ultimate goal for procurement is the stimulation of ‘good’ demand and increasing value to the business derived from spend (and supply markets) rather than simply reducing ‘spend’ magnitude.

In the process of following procurement‘s evolution we uncovered six signposts to procurement‘s future value, which reflect the value received by the business, for example through innovation and growth; and to who the value is presented, which could be the supply base, the business or the customer. The six signposts described in Chapter 8 are:

  • No 1 – intelligent cost-reduction strategies: new commercially focused demands are rocking this traditional area of procurement strength. Globalization has proven to be more about revenue growth than cost savings. Spend management is shrinking and the focus is on profits. Today CEOs might well ask the question ‘how much might that price cost the business?’ You will have to be able to answer it.

  • No 2 – a holistic focus around risk: risk management has to become everyone’s business as capacity and demand soar and complexity dominates our thinking. The process of selecting suppliers will carry more risk, more complexity, and become increasingly fluid. As converging trends make supply relationships even riskier as this decade progresses, innovative cross-organization solutions will need to be developed as contexts and challenges change. Supply management will need to anticipate scenarios and increase awareness around supply risk, plus an expansion in its perception of where risk lies.

  • No 3 – customer-centricityprocurement must become more involved in determining what the customer wants and what the organization needs from suppliers to deliver it. Direct engagement with large business-to-business customers must become a key part ofprocurement‘s role. Essentially, managing value can help to deliver profitable growth; for example, innovation is focused on products and services that provide value to the customer. Procurement is expected to deliver innovation, often from the supply base and this is reflected in the end product or service. Any innovation that does not provide additional value relative to the best alternatives is in essence money wasted.

  • No 4 – sustainability and diversity challenges: in today’s business world we face an array of difficulties whose scope and complexity can make them intractable. Sustainability, once considered the preserve of the impassioned few, has become a burning issue to all in business. A key sustainability theme today is supplier diversity. Suppliers have an impact on the price and quality of an organization’s products and services. They affect efficiency and ultimately they can affect the performance of an organization, including its relationships with key stakeholders. They can also help businesses meet corporate social responsibility (CSR) objectives, improving sustainability and reducing risk.

  • No 5 – embracing change: flooded with more information than ever, supply managers need to be able to discern and act on the right intelligence. They also need to think about their visibility and impact within the business. This refers to both the impact that the organization’s own purchasing choices has on its brand, as well as a need for procurement to build its own internal reputation within the organization.

    As we have already seen, procurement has a brand and PR challenge. Although information is freely available it would seem that less is being effectively captured, managed, analysed and made available to the people who need it. Procurement leaders must be purposeful and effective. Gaining the visibility and developing alliances internally does not appear to be attracting the attention it needs in terms of activities and programmes to achieve this.

  • No 6 – procurement‘s bright future: much of the foregoing suggests that procurement‘s bright future may actually be a change of modus; one where the incumbents are more entrepreneurial, brand-conscious analysts with a bimodal capability – a group of enablers, operating under a name that is yet to be determined: but it will come.

[13]The five rights of procurement are: the right quality, the right quantity, at the right price, at the right place, at the right time.

Overcoming the barriers to value creation

One of the biggest challenges to procurement is how to effectively leverage its relationship with the supply base. From a procurement perspective, four issues act as barriers to developing value-based relationships with suppliers. The first is the never-ending focus on cost savings. This often shuts down any discussions about better ways of working. The second relates to how suppliers are measured. There is the challenge of ‘control versus collaboration’, and finally for many managers in business it is simply down to finding the time.

It would be naive to expect companies to ignore cost pressures. Most businesses are focused on lowering prices rather than dealing with the loftier goal of finding routes to develop intelligent cost-reduction strategies. With respect to metrics, although measuring supplier performance is critical, this fact frequently prevents more important dialogue, and certainly any dialogue about value-creating activities.

Moreover, for many organizations today the ageing systems they have in place are simply not flexible or mature enough to support supplier innovation. A further barrier is that many people in procurement simply do not have the knowledge or experience, let alone the time, to have more in-depth discussions with suppliers to identify opportunities for value creation or innovation.

One way to address this problem might be to move beyond the linear (dyadic) relationship between supplier and buyer. There needs to be a transformation so that both are working collaboratively to meet the needs of the customer. Possibly the best way to achieve this is via the development of a set of services that increases the buyer’s and ultimately the customer’s perception of value. From a buyer’s perspective, this might be achieved through a new type of business relationship.

As C-level executives chart the future course of their businesses, they will have several simultaneous objectives. First, there is the need for strategic alignment with rapidly changing business contexts. Second, there is the need for effective execution of these strategies, to ensure that supplychains are sustainable, flexible and responsive. This will be achieved through the effective use of the networks, collaborative relationships and deep commercial focus at their disposal. Finally, delivery of value must be seamless, without operational interruptions or performance slips. It will in essence be a strategic balancing act and one that requires strong leadership.

The dilemma, or enigma, depending on how you wish to look at it, is what is modern procurement‘s value to the business? From the perspective of the CPO it must relate to the now long-standing debate between cost (reduction) versus value (creation). Or, more to the point today, risk (management) versus value (creation). CPOs must create equilibrium in their focus between the business and the market it serves by understanding the right levels of focus of their procurement team on their internal clients and stakeholders, and the external market and customer base.

In Chapter 9 we introduced the notion of commercial twist. This relates to the ‘elasticity’ of the business model being deployed at any one time. As mentioned above, CEOs in their efforts to chart the future course of their businesses will have several simultaneous objectives. As important as this is, they must also understand the threats to the viability and sustainability of the enterprise as a result of innovation and discontinuity, and they must be capable of applying a ‘commercial twist’.

 

They need too to be able to execute those strategies effectively; ensure that their supply chains are sustainable, flexible and responsive; and create equilibrium in their focus between the business and the market. They must be tuned in so that when conditions change, as a consequence ofany discontinuity, they can twist the organization at the point of change so that the enterprise can ride the wave.

Rigid adherence to the tried and trusted – standard procedures or misplaced tradition – can mean that current needs are not well met and innovation is stifled. There is a clear and present need for ongoing, active management of commercial focus balanced across the business and it is here that agility makes a huge difference, not least in maintaining an understanding of business need as circumstances change. Here the process of involving suppliers, buyers and customers to find and share, translate, understand, assess, select and implement, and communicate becomes the catalyst for value creation.

To conclude

The future of purchasing and supply management is an important concern and it is possible to identify some key themes predicting its future developments as a profession, function and process.

Key factors, such as globalization, technology and a greater need for the integration of business processes, are influencing the development of purchasing and supply. There is a need to understand better the changing identity, structure and processes of purchasing and supply within organizations, from a broad business perspective. There is also a need to better understand this role as it impacts corporate success, and the link between purchasing performance measurement and corporate performance.

More focus is required around risk and sustainable procurement, and other issues such as the increasingly complex contextual issues in procurement, and how patterns of change vary across different sectors. Whilst we have a reasonably good understanding of the key factors that need to be taken into account when considering the future of procurement, there are a lot of important innovations in today’s function that have been initiated outside procurement, which raise important questions. One immediate question is whether, for example, there has to be a much greater cognizance of the need for interdisciplinary cooperation in thinking and service provision in the field of procurement at the highest strategic levels.

It seems that there is the possibility of a convergence of several disciplinary groups all attempting to develop their strategic contribution by moving into one ‘domain’: supply management. To understand the future role and contribution of procurement in dynamic business environments, it is essential that procurement leaders consider the views of specialists from other functions and senior managers, not just those within professional procurement.

To deliver its value proposition and meet the needs of business today implies a different role and set of responsibilities for procurement. At its disposal will be smarter systems, increasing responsiveness and limiting but not excluding the need for human intervention.

Procurement‘s future role will require investments in talent management and then the development of this talent. In considering these options, the next task is to evaluate the feasibility of implementation in terms of organizational readiness and capability proficiency. In making that assessment, we can use the ACE model identified in Chapter 5 to evaluate which options are feasible.

With the massive global economic shifts we have recently encountered, ‘change or perish’ pronouncements pile up. Supply management has at its disposal the necessary ingredients to make supply chains substantially better connected and more important to current strategic enablers. Thegrowing understanding of CEOs of how critical the procurement function is to the company’s success establishes the challenge and the opportunity to create change.

There is little doubt that procurement is increasingly gaining control over its main purpose: the sourcing of goods and services for the organization it serves. However, in this modern era, procurement professionals are facing a variety of broad challenges. All organizations are rapidly investing in new technologies to meet the challenges of business in the contemporary, global marketplace; however, procurement often lacks the skills required to take full advantage of these tools and circumstances.

As scrutiny of organizations’ environmental and ethical practices increases, there is also a requirement for procurement to understand the implications of its corporate responsibility and sustainability. Efforts to make a bigger contribution to corporate strategy continue, but sometimes at thecost of misunderstandings between procurement and the rest of the business. And yet procurement has much expertise to offer, which can provide substantial financial benefits. Convincing colleagues across the business of this, and aligning not just goals but thinking about where theprocurement can and cannot add value, is potentially the biggest challenge.

However, this is no reason for not trying to anticipate what may happen or for not trying to shape developments for the better. It is true to say that the only way to predict the future is by helping to shape it. There needs to be a constructive debate about where and what value procurement can bring to the business. Blind faith is not enough. This book represents our contribution to uncovering how procurement will deliver value to both business and society for them to thrive.

Notes

  1. Robert Wright, in his book Nonzero: The logic of human destiny (2000), argues that biological evolution and cultural evolution are shaped and directed first and foremost by ‘non-zero-sumness’, ie the prospect of creating new interactions that are not zero-sum.

  2. Maslow, A H (1943) A theory of human motivation, Psychological Review, 50, pp 370–96.

  3. Drucker, P (1959) The Landmarks of Tomorrow, Harper & Row, New York.

  4. Reinecke, N, Spiller, R P and Ungerman, D (2007) The talent factor in purchasing, The McKinsey Quarterly, 1.

  5. Chick, G and Lewis, M (2009–10) 7 habits of highly effective CPOs, CPO Agenda, Winter, pp 50–54.

  6. Kraljic, P (1983) Purchasing must become supply managementHarvard Business Review, 61 (5) September–October, pp 109–17.

  7. Cousins, P, Squire B and Lawson, B (2008) Looking to the Future: Purchasing as Cost Reducer or Value Broker? A research report carried out for the CIPS Centre for Procurement Leadership by Manchester Business School, July.

  8. In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange or the cost of participating in a market.

  9. Social exchange theory is a social psychological and sociological perspective that explains social change and stability as a process of negotiated exchanges between parties.

  10. See Rob Handfield’s SCRC Supply Chain Blog, 12 December 2013, Unlocking the Secrets of Guanxi in Supply Chains.

  11. Allison, G (2014) A good year for a Great War, Harvard, Kennedy School, Winter.

  12. Yasukuni Shrine is a Shinto shrine in Chiyoda, Tokyo, Japan. It was founded by Emperor Meiji to commemorate individuals who had died in service of the Empire of Japan.

  13. The five rights of procurement are: the right quality, the right quantity, at the right price, at the right place, at the right time.